Options Bulls Score Big on PepsiCo Rally

Traders just doubled their money on Schaeffer's recommended July 120 call

Subscribers to Schaeffer's Weekend Trader Series newsletter just doubled their moneywith our PepsiCo, Inc. (NASDAQ:PEP) July 120 call option recommendation. Below, we'll explain how this short-term options trade hit its 100% target during a period of time where the soda stock rose just over 6% on the charts.

When we initially recommended the call in our April 7 email to subscribers, PEP stock had just touched a record high of $123.19 on March 27. Former resistance in the $120-$122 neighborhood -- which also marks a 10% year-to-date gain -- then stepped up to provide support on a pullback, creating an appealing technical entry point for a bullish play (particularly given PEP's tendency to outperform in the April-July period).

The sentiment backdrop also supported a call trade. A 48% spike in short interest since February created room for short-covering tailwinds to lift the stock. Plus, nearly 60% of covering analysts had given PEP a tepid "hold" opinion at the time, leaving the door wide open for future upgrades to lure more buyers to the table.

And among options traders, the equity had racked up a 10-day put/call volume ratio of 1.19, in the 94th percentile of its annual range -- pointing to a healthier-than-usual appetite for long puts over calls over those past two weeks.

Finally, our recommended call had a leverage ratio of 15.1, meaning it would only take a 6.7% jump in PEP shares for the option to achieve its target profit of 100%. In other words, the options trade provided substantial leverage over a comparable stock trade.

PEP initially stayed quiet after our early April recommendation, but the stock took flight on April 17 after a first-quarter revenue beat caught pessimistic traders and analysts by surprise. At least seven brokerage firms lifted their PepsiCo price targets after that well-received report, and Wells Fargo hiked its target for a second time in mid-May.

This bullish upswing in analyst sentiment coincided with a mass exodus by the shorts. During the two-week period ended May 1, short interest on PEP dropped by 10.2% as the stock ran to a string of new highs.

This combination of a positive fundamental driver, coupled with Pepsi stock's strong price action and its sentiment backdrop of unwinding pessimism, created the perfect setup for our subscribers to achieve 100% profits on their PEP July 120 calls on Wednesday, May 15 -- less than six weeks from the initial recommendation date.